How does inventory turnover affect the supply curve? Can increased quantity demanded lead to a lower market equilibrium price?
1 Answer
A high inventory turnover causes the quantity demanded to increase and the price as well. Low inventory turnover causes the product's value to deteriorate. Yes, quantity demanded can lead to a lower market equilibrium price.
Explanation:
What is Inventory Turnover?
Inventory turnover can be defined as the ratio of a company's sales to its average inventory, over a period of time.
Inventory Turnover Formula
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How does inventory turnover affect the supply curve?
When a company has a high inventory turnover, it is typically because the product is perishable. The high turnover is caused by the quantity demanded by buyers to increase. Under this scenario the seller would have the option to increase the market price of the good.
When a company has a low inventory turnover, the company may not have a demand for its good. This causes the manufacturer to reduce his/her sale price, reducing their fiscal revenue generated.
Can increased quantity demanded lead to a lower market equilibrium price?
If there is an increase in demand for a good, it is up to the manufacturer to reduce a price (sale) or increase it. The classical economist always hypothesizes that the market forces will set the market price to equilibrium(exclusive of taxes).
